Thursday, June 15, 2017

China's bridges to growth?

“The amount of high bridge construction in China is just insane,” said Eric Sakowski, an American bridge enthusiast who runs a website on the world’s highest bridges. “China’s opening, say, 50 high bridges a year, and the whole of the rest of the world combined might be opening 10.” Of the world’s 100 highest bridges, 81 are in China, including some unfinished ones, according to Mr. Sakowski’s data... In 2016 alone, China added 26,100 bridges on roads, including 363 “extra large” ones with an average length of about a mile, government figures show...

The vertiginous Duge Beipan River Bridge, the world’s highest, vaults a 1,853-foot-deep chasm in southwest China. On the Aizhai Bridge, drivers shoot out of a tunnel to cross a 1,165-foot-deep gorge and then whiz straight into another tunnel. The Qinglong railway bridge carries high-speed trains over a graceful arch 968 feet above the Beipan River in Guizhou Province... China also has the world’s longest bridge, the 102-mile Danyang-Kunshan Grand Bridge, a high-speed rail viaduct running parallel to the Yangtze River, and is nearing completion of the world’s longest sea bridge, a 14-mile cable-stay bridge skimming across the Pearl River Delta, part of a 22-mile bridge and tunnel crossing that connects Hong Kong and Macau with mainland China.

These projects face apparently insurmountable financing challenges,

The projects are often financed by loans from state-owned banks to companies owned by local governments, which collect tolls to repay the loans. But on many routes in less populous inland regions, tolls are not keeping pace with the costs, setting off a spiral of mounting debt and rising expenses. The Chinese government estimated that expressways nationwide lost $47 billion in 2015, more than double the loss in 2014.

These are clearly massive challenges and for sure there has been a bridge building frenzy with all its excesses and corruption. Further, the costs-benefits assessment for many of these bridges may not be favourable.

But I am not too concerned by these. In such infrastructure projects, especially in large countries with huge economic growth potential, it is not at all a bad idea to back the "build and they will come" approach. As the article itself acknowledges, the high-speed rail and Pudong skyscrapers were built on that and their benefits are now being fully realised. And the same has been happening to the many much derided ghost towns.

We live in a world of compressed memories, with even academic accounts of costs-benefits assessments being squeezed into time. But these costs-benefits assessments may have to be done with a far longer time horizons, over several decades. It may not be possible to anticipate many of the emergent developments that add to the value of these investments. For example, a new factory comes to a town adjacent to the bridge/highway, which in turn triggers the large-scale transformation of the region. Also, the vast majority of these investments may have to be funded by governments. For many of them, given that these are completely virgin routes, there is likely to be limited diverted and induced traffic for years after construction. It may be possible only after several years, maybe decades, to realise a part of the capital expenditures by monetising them. Some of them may never recover the investments.

The interstate highway system in the US is the best counterfactual. If the standard costs-benefits analysis and tolling considerations were taken into account, the vast majority of the stretches in the system would have been considered unviable and there would have been no interstate system. Fortunately, the leadership at the time was far-sighted and not hamstrung by such narrow considerations and the entire system was constructed with public finance. For decades after construction, vast swathes had low traffic density. Today, it is acknowledged as an important contributor to US economic development. What's more, parts of it are being tolled or monetised.

It is also for this reason that the debt overhang of Chinese public sector banks should be viewed differently from conventional bad loan problems. To the extent that a major share of these loans finance infrastructure projects which ought to have been financed by the government, the public sector bank loans should be considered as a proxy for public finance. In the worst case scenarios, the low government debt to GDP gives the government in Beijing sufficient space to accommodate these loans. None of this is to condone the undoubted inefficiency and corruption associated with this approach to building public infrastructure.